Rhode Island’s House and Senate finance committees are scheduled to meet at 5 p.m. Thursday to consider an amended version of pension-overhaul legislation on the heels of a report that pegs the state’s unfunded pension liability at nearly twice what state officials have estimated.
The two committees on Wednesday amended changes to the Rhode Island Retirement Security Act, proposed by Gov. Lincoln Chafee and General Treasurer Gina Raimondo. According to the Providence Journal, the revisions would shorten the waiting period for a pension increase, which under the original bill could be up to 19 years. The changes would also provide retirees with cost-of-living increases, or COLAs, every five years, but limit those increases, House fiscal adviser Sharon Reynolds Ferland told the newspaper.
Earlier in the week, an Arlington, Va., think tank estimated the state’s unfunded pension liability at $18 billion, almost double the state government’s estimated $9.3 billion.
A report by the Mercatus Center at George Mason University said Tuesday that the return on Treasury bonds is the appropriate discount rate to apply when valuing liabilities, not the expected return on pension asset investments, which is the standard practice for such pension funds. The Mercatus recommendations would undermine the assumptions supporting pension accounting far beyond little Rhode Island.
“It values liabilities with reference to something safe, Treasury bonds,” Eileen Norcross, who co-authored the study with Benjamin VanMetre, said in an interview from Washington, D.C. According to the metrics Norcross and VanMetre used in their report, other Rhode Island communities with seriously unfunded pension liabilities are bankrupt Central Falls, capital city Providence, plus Johnston, Cranston and Newport.
Late Wednesday, Chafee said the amended bill fails to solve the problem of Rhode Island's municipal pension insolvency. "Truly comprehensive pension reform must include municipal pension reform," he said, adding that 24 of the state's municipal plans are failing.
Central Falls, which has been under state receivership, filed for Chapter 9 bankruptcy protection on Aug. 1, triggering several downgrades of municipalities and conduit issuers from credit rating agencies. Central Falls, with a population of 19,000, has an estimated unfunded pension liability of $80 million.
Rhode Island’s general obligation bonds are rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings.
The bill by Chafee and Raimondo, both of whom took office in January, proposes creating a hybrid pension plan that merges a 401(k)-style plan with conventional defined benefit plans. They also propose raising the retirement age and suspending the cost-of-living adjustment, or COLA contribution, which would effectively reduce the state’s unfunded liability.
Public worker unions have demonstrated outside the state capitol in Providence throughout the special session. “The state wants to modify the plans and there are going to be lawsuits. This will play out in court,” Norcross said.
She added: “The recent bankruptcy in Central Falls illustrates the fiscal impact large pension obligations can have on a city’s finances and prospects and is a scenario that may be facing several cities in the near term.”